Check image exchange inches its way to POS

new report predicts that 2006 will be the year check image exchange enters the mainstream.

That's good news for banks and other organizations that spent better than $1 billion last year alone on check imaging technologies. It's apt to take a few more years, however, for the momentum behind check image exchange to reach the merchant community.

The report, "Check Image Exchange: Roads to Rome," authored by Celent LLC Analyst Alenka Grealish, predicts that by the end of 2006, 18% of inter-bank check clearing in America will be done electronically, end to end. That's a significant increase in adoption, considering no more than 5% of these checks (known as transit items) were cleared as end-to-end electronic items last year.

In a very optimistic set of predictions concerning check image exchange, Grealish expects that the share of checks presented and received electronically between banks will reach 56% in 2006. By 2010, she envisions that banks will present and receive 90% of transit items electronically.

In check image exchange, checks are truncated as soon as possible after entering the collection stream. They are then cleared and settled using an electronic network that mimics the land- and air-based collection process traditionally used for check collections.

The transition to check image exchange has been seemingly stuck in mud since the Check 21 Act took effect in late 2004. Many expected that law to jump-start image exchange by removing a key obstacle to wide-scale check truncation adoption. The Check 21 Act overrides all state and federal laws that mandate possession of original checks (e.g., proof of payment). It also sanctions the use of substitute checks in lieu of the originals.

The idea behind the law was to make it easier for banks to truncate checks and present them for payment electronically without forcing any other banks to accept electronically-presented checks. The result has been a hybrid collection system in which electronically processed files are printed as substitute checks before final delivery to paying banks.

Although substitute checks can be pricey (about a dime each, paid by the collecting bank), banks don't seem to mind. According to the Federal Reserve, last year 90% of checks that were presented for clearing electronically through the Fed were eventually delivered on the other end as substitute checks.

Grealish's analysis suggests that banks haven't sat idly shelling out millions of dollars in substitute check fees. U.S. banks, especially larger banks, have been spending heavily on technologies to support image exchange, just over $900 million last year, Celent estimated. Now most banks are ready to start sending and receiving check images.

Grealish expects check image exchange to follow a path similar to that charted by ATM networks, which sprang up in the late 1970s and early 1980s largely as proprietary and unlinked entities. Today, an ATM that isn't connected to regional and/or national EFT networks is unheard of.

Several image exchange networks and archives are linked already. The Fed's network can now send and receive images with SVPCo, the big-bank image exchange network. Viewpointe, a massive check archive and exchange gateway used by Bank of America Corp. and other large banks, now links to Endpoint Exchange and Fiserv, both of which support image exchange networks and archives for thousands of small and mid-sized banks.

"Unlike ATM networks, however, [image] exchange traffic will slow as the number of checks processed falls and as image share volume grows as members of shared archives not yet sharing begin to do so," Grealish wrote in the report. One factor that could dampen enthusiasm for check image exchange is pending litigation claiming infringements of imaging technology patents.

DataTreasury Corp., a New York-based payment processing company claiming the patents, has already negotiated undisclosed financial settlements with several companies that have stakes in image exchange. These include JPMorgan Chase & Co., Ingenico Corp. and RDM Corp. (both Ingenico and RDM market check image scanning devices).

Article published in issue number 060301

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